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June 08, 2015 at 10:59 AM
The intensive focus of the consumer media on investment returns and retirement plan expenses has contributed to a profound misunderstanding of the true value of a retirement advisor.
Indeed, laments Dalbar’s Lou Harvey, the misperception of retirement advisors’ contribution to U.S. retirement security goes unappreciated by employers, plan participants and even many advisors.
The Dalbar CEO, who has long offered self-study fiduciary training for retirement advisors, says that enhanced investment returns are surely not a retirement advisor’s purpose since the best retirement fiduciaries use asset allocation strategies that deliberately reduce returns (as a means of wealth preservation).
Rather, in a post to his LinkedIn blog, Harvey provocatively asks members to imagine what the world would look like if there were no retirement advisors — as a means of correctly assessing their value.
Retirement in the U.S. would be far less secure absent advisors because there would be far fewer plans, vastly reduced participation rates and such plans as existed would be undiversified.
Specifically, Harvey estimates that of the more than 600,000 plans today, 90% to 95% would not exist. Further, today’s 87% participation rate would fall below 25%. Finally, stable value and fixed income investments would be the rule, and diversified portfolios including stocks the exception, in a no-advisor world.
“These estimates are not mere speculations but were the facts in the 401(k) marketplace before retirement advisors were active,” Harvey writes.
The 5 million businesses still without retirement plans makes retirement advisors an essential current need, he adds.
But moving away from the big picture of retirement advisors’ economywide contribution to the micro-view of the challenges these advisors face offers still greater clarity on their true value.
That is because of uncompensated and labor-intensive work they perform vis-à-vis the employer (to institute the plan) and each individual employee (to secure his or her participation).
The former entails persuading an employer to increase business expenses on the basis of altruism and a hard-to-quantify long-term benefit for which employees may not evince much initial enthusiasm.
If the advisor can jump that hurdle, he must then persuade employees to essentially take a pay cut and then wait years, if not decades, before seeing a meaningful accumulation of retirement assets.
While these difficult steps must occur prior to any compensation whatsoever, the advisor has the added burden of performing these tasks amid severe business and regulatory risk.
